Morning Reading

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax.

I think if you put leading economists into a room to negotiate on the stimulus, this is where they would end up. Instead, the actual stimulus bill is really, really far away from anything that sensible economists would have written. Not that ignoring economics is such a shock. But I expect better from Democratic administrations, and I expected better from Larry Summers.

One reason I admire Oakeshott is simply his understanding that the two deepest impulses in Western political thought - the individualist and the collectivist - need each other to keep our polities coherent. He, like me, preferred the individualist, and so my own leanings are toward smaller government, lower taxes, balanced budgets, individual freedom and prudent strength in foreign policy. But... Government exists in some measure to provide a collective response to a newly felt need.

Comments and Sharing

The pessimist in me is glad to see all these economists coming together to find some middle ground that can patch up this mess and stop the bleeding.

The optimist in me sees that they are trying to repair a broken down house built on a foundation of sand, and that hopefully what will come out of this is an opportunity to build a truly free society. Somewhere.

Are cuts in payroll taxes really that effective when fewer people are employed (have taxable income)? At a certain point, not enough people have income on which to pay taxes. And as long as unemployment is rising, putting more money into the pockets of those still employed will have limited effect on consumption because of fear that future income is limited (that is, "who is going to be unemployed next?")

A payroll cut immediately lowers the cost of employing workers. If something costs less, people demand more of it. I don't buy the short-term psychological arguments, but rising wages during a recession will increase confidence because the payroll cut is a permanent increase in wages. A worker immediately feels better if their wages are going up in a recession and they know it's permanent.

I don't see how a payroll TAX cut lowers the cost of employing workers.

If your argument is that employers can pay less while keeping their workers' take-home pay constant, I'll buy that, but then the second half of your response doesn't make sense.

From my point of view as a worker (so far), I'm staring potential unemployment in the face (it is a very real possibility). So if I had my taxes cut, or wages increased, the extra money would not be spent, but stashed in anticipation of a drop in future income. I certainly wouldn't "feel better."

Of course, some would equate future deferred consumption with present consumption, but that argument is tricky at best.

Also, some would want to equate my savings with investment. Again, I don't know if that is valid right now.

OK, that was the sort of answer I was looking for (minus the sarcasm).

So, ultimately the discussion needs to be whether gov't money is better spent by giving it to the 92% of the population that is still working (but might not be next month), or by hiring some of the 8% that is currently unemployed (and not likely to be employed otherwise next month).

First, Mankiw proposes an offset (a good one at that) to make his cut revenue neutral. That was lacking in previous formulations pposted on this blog.

Second, he explicitly states that the cut is permanent, since he knows full well that a temporary cut would not have a considerable and prolonged positive effect on a structural problem.

Third, Mankiw does not specify which contribution (employer's or employee's) to cut. This is another dispute we have had to which he lends no support on either side. One could assume, but perhaps one should not.

Fourth, he suggests cost-benefit analysis for additional spending.

"Any further federal spending projects should be evaluated on the basis of cost-benefit analysis. That analysis would take time, but it would ensure that the projects are not a waste of taxpayer dollars."

However, he gives no hint of any framework for the analysis. Should it be economic cost-benefit, fiscal cost-benefit, or both? That's the most important question we must answer before I can accept that suggestion as being uttered in good faith. We did half-assed fiscal cost-benefit analysis under Reagan and we found out something absolutely astonishing (tongue in cheek): government costs money. It was thus concluded that government is the problem and it must be destroyed, one piece at a time if necessary. In the process, we learned little or nothing about the benefits governemnt confers generally on society and specifically with respect to the economy or our collective, average, and median material wellbeing. If we learned little it was that we were sorry in some respects for the slow, delayed consequences of dismantling useful functions of government, like the mental health system Reagan dismantled in California, and bolstering the wasteful, destructive, and unsustainable ones like his defense buildup.

8,

A payroll cut immediately lowers the cost of employing workers. If something costs less, people demand more of it.

Perhaps your demand for labor, or anything, is based on its cost AND utility in comparison to the cost AND utility of alternatives. Cutting the marginal cost of labor does not, in itself, encourage more hiring if the marginal product of labor is in decline because the marginal value of their output is evaporating. When demand is faltering, employers may take the savings on their bare-bones staffing and not change their plans much or at all. They may not be able to drive more sales by hiring more workers. Then what?

To this end, Mankiw writes:

"Some traditional Keynesians would object on the grounds that government spending has a larger multiplier than tax cuts. Even though that is the prediction of standard Keynesian models, the evidence is not completely consistent with that conclusion."

The evidence I see is 1.) declining consumer spending and 2.) massive accumulating unemployment. I suspect it won't even stop at 9%. We'll see.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax.

I think if you put leading economists into a room to negotiate on the stimulus, this is where they would end up. Instead, the actual stimulus bill is really, really far away from anything that sensible economists would have written. Not that ignoring economics is such a shock. But I expect better from Democratic administrations, and I expected better from Larry Summers.

I could not agree more. The lower payroll tax and higher CO2 tax solution seems rather obvious and risk free. We, all of us and especially the Obama team, should push this to the max. What is going on... really!

How can one talk about jobs, consumption, energy independence, climate change, budget deficit etc without the lower-payroll-now and higher-CO2-tax-later option?

How come the Republicans are not talking about it? Ah.. I forgot - they wouldn't raise the gasoline tax at any.. cost! It's like both parties want to spend and reshuffle but not earn and balance?

Don't be afraid of voters and the "streets" (main or wall or whatever street name). One can explain the trade-off easily and the payroll tax kicks in first anyway (as Mankiw and others have explained). Really. Let's not get hijacked by old fossils - the technology behind it that we hold so dear is independent of fossils. When Hero of Alexandria invented the engine during the same time that Jesus walked the earth...

Yo... everything that Obama wants to spend on would be better served in the long-run through tax cuts and or increases. Or he could end some needless subsidize (keyword agriculture). I understand the administration's sentiment to back-up the kensian model regarding higher pay-back of spending over taxes.

But I do not think that the multiplier is really why the Obama administration relies so much on spending. I believe that they believe that unless the economy experiences some fast relieve - the disease will spread too far. It is a timing and not a multiplier issue. I agree that in the short-run many companies would not invest a payroll tax cut in new, job-creating projects. Government spending would - thereby slowing the illness.

But why not discuss the the lower payroll and high CO2 tax option here and now as a long-term solution that can complement spending in parallel here and now. The deadweight losses of taxes are less costly than of subsidize and they ensure that money is invested sustainably and without costly and risky regulations.

The second one, only if you want to be hung from a light post, tarred, and feathered. Seriously, whether the economics to raise gas prices by taxing the hell out of consumers are good or not - they aren't, but whatever - the people will not only be outraged, but murderously so. I hope for your own safety you don't try and push that any further.

Cutting the marginal cost of labor does not, in itself, encourage more hiring if the marginal product of labor is in decline because the marginal value of their output is evaporating. When demand is faltering, employers may take the savings on their bare-bones staffing and not change their plans much or at all. They may not be able to drive more sales by hiring more workers. Then what?

El Presidente,

Businesses aren't firing workers only because the marginal product of their labor is in decline, they also anticipate further declines (higher costs). Reducing the payroll tax lowers their costs. I don't totally disagree with you, but I think this is one of the best solutions and least harmful in the long-run.

Politically, I wonder what AARP would say; it is also a stealth cut in Social Security and Medicare (although am I wrong to assume older people consume less gasoline?). It moves wealth from the old & rich to the young & poor. It's also in the direction of a FAIR tax, and the environmentalists and energy nationalists will like it. Seems like a win-win-win.

But I do not think that the multiplier is really why the Obama administration relies so much on spending. I believe that they believe that unless the economy experiences some fast relieve - the disease will spread too far. It is a timing and not a multiplier issue.

I think it's both timing and multiplier, but I think there is also a third component: changing the pattern of distribution. Time will tell whether we repay this debt equitably through taxation that makes sense or whether we repeat our past mistakes, but using expenditures and repayment to split the process of redistribution and gain value in the process helps to strengthen our social and economic bonds in ways straight redistribution cannot.

I don't totally disagree with you, but I think this is one of the best solutions and least harmful in the long-run.

That may be. I like to defer to Keynes on that.

"But this long run is a misleading guide to current affairs. In the long run we are all dead."

Compassion requires intervention followed by discipline. I am persuaded that our pattern of wealth and income distribution is the primary culprit in this mess. Because of this, I am more than willing to accept permanent cuts to the employee's contribution offset by other taxes, such as Mankiw's idea. For the same reason, I cannot accept permanent cuts to the employer's contribution. Since temporary relief will not help the situation if it is understood to be temporary, I cannot support that either.

"But this long run is a misleading guide to current affairs. In the long run we are all dead."

Compassion requires intervention followed by discipline.

Interesting that you should call fobbing off the cost of your short term happiness at the heavy price of a long term burden on your offsprings and and their offsprings "compassion". It is you who will benefit from the short term pops from intervention and it is they who will have to suffer the discipline.

I am persuaded that our pattern of wealth and income distribution is the primary culprit in this mess.

You're easily persuaded by the utopian promises of socialism (I know, I know, you guys don't call it "socialism" anymore, but calling poo candy doesn't make it taste or smell sweeter).

Tell you what, let's give politicians more power and bring industry under their control so that these selfless politicians may proceed to make things "more equal". Then we will have a pattern of wealth and income distribution that lead to the Soviet mess and collapse. That's infinitely better. A strong pattern in all of your comments on this blog is a willingness to ignore the fact that man is self interested and responds to incentives. The soviets spent 70 years trying to remake man. But, dammit, each generation was born as self-interested as the one before it.

ok. I'll come out off da closet. there are some, only a few, spending initiative that I would support right now besides the payroll tax break.

Instead of investing in questionable R&D for e.g. clean, domestic energy - subsidize every kWh of clean (0% CO2) energy. Pay the same amount that you tax CO2 - or that you subsidize CO2 - for every kWh of 0% CO2 production. It does help from a behavioral economics point of view for new project investments and domestic job creation - both in the short and long-run. Germany is a good case study for that. So is Spain.

I am no expert on the current health care situation but I reckon that no matter what happens - full privatization is an utopian option. Computerizing the state system in the meantime makes sense.

But "pushing" a smart grid does not. The economics for smart grids are here already. Make it even more attractive via higher CO2 taxes and a CO2-reward. But do not push green R&D and state managed smart grids. Deregulate energy like in California and let the utilities figure out what they want to do.

And again - given that we do not have savings - we have to make sure that we balance.. spending. I.e. we need the CO2 tax.

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